A Complete Profit Collapse...

gotta talk of bears bear peace straight

from TS Lombard on a potential profit

collapse or is there uh or will we just

get more weight Cuts let's find out all

right let's see the best one can get out

of the latest GDP numbers are indicators

from last week are indications for the

quarter ahead and the upturn in

non-financial profit so outside Banks

right profits outside Banks there is no

ongoing profit squeeze to finally

contract growth in Q3 slowing yes but

contraction no okay fine profits lead

wages and hiring And precede Capital

spending so in English profits first

then you hire then you invest

all this ties together to determine

Trend inflation Real gross domestic

income has been falling despite Rising

GDP because of profits as corporate

profits can go up without necessarily

Rising incomes yet

with this quarter's turnaround gross

domestic income Rose half of a percent

in Q2 after declining 3.3 percent in Q4

and 1.8 percent in q1 GD expect GDI to

be adjusted upward in September Bureau

of economic analysis has reset its

treatment of net interest

as much of the income should be more

reliable in terms of an indicator of the

economy GDI is what typically ends up

taking on the bulk of the adjustment

okay great so what does all of this

actually mean and what does it matter

well here's this pretty neat chart and

it basically shows you this pretty

strong correlation between hiring and

margins as margins go up you tend to get

more hiring and as you get more hiring

the goal is hopefully margins continue

to go up and once margins Begin to Fall

hiring Falls and there could be a little

bit of a mismatch lead and lag in this

depending on when some of these things

are reported but intuitively this makes

sense companies make less money they uh

on on gross profit they end up hiring

less

great so employment growth excluding

White Collar about to reverse now I

thought this was a very interesting

title because it really suggests that

look we have had this nearly White

Collar recession here right blue being

white collar here black being blue color

which is kind of ironic you think they

would have used blue for blue color but

anyway

you can see that blue collar employment

has been very very strong and this is

one of the reasons some have actually

called this recession or whatever we're

in a rich session in other words oh the

wealthier Richer people are getting

screwed more they're able to buy less

Teslas they're able to buy less infase

solar panels and they're basically

getting screwed because you know these

finance jobs are getting laid off

Goldman Sachs is doing another round of

layoffs the banking crisis led to

layoffs what's fascinating though is

this potential that we might be at an

inflection point we might have hit a

bottom in the white collar Rich session

so to speak this could by the way

correlate although we did have recent

news with the Tesla Model 3 Highland

release it could potentially correlate

with an increase that we're seeing in

search trends for buy Tesla I'm not a

big fan of just searching for models uh

when you look at Google Trends and I

don't mean like women models I'm I'm

talking about like Tesla Model three

search results I'm a big fan of just

searching things like buy Tesla or lease

Tesla or cost to buy Tesla and we are

seeing an indication as we talked about

earlier that we're trending back up

above that 50 percent uh relative

strength level we usually don't stay

above that for very long but the longer

we can stay above or near 50 the better

it ultimately is for Tesla sales so

really important and it is possible

that if you end up getting a recovery in

White Collar employment you could end up

sooner rather than later ending up

seeing these companies that that

originally you know I I personally

thought as well like you know oh okay

this was you know if we're gonna have an

inflation recession it was just going to

be it was solely going to be the poor

folks that ended up getting hurt and

what ended up happening was it was yes

poorer folks got hurt by inflation that

was true but the people who were really

getting layoffs and a lack of pay raises

were the finance folks or the white

collar people the office workers the HR

workers AI hit that sector as well as

opposed to the blue collar and so that

ends up hating stocks like and Tesla and

otherwise right even honestly going down

to PC demand office demand office

equipment demand office furniture demand

uh Home Furniture demand Restoration

Hardware and you know all this sort of

stuff

profit margins were never going to stay

at 2021-22 levels obviously they they

reflected a transitory peak in demand

and pricing power this is very true the

inevitable deceleration slows wage

growth and hiring that's true and that's

what we're seeing now at the same time

inflation from Peak demand and Peak Cove

disruptions also unwinds and unwinds for

a longer term therein lies the magic

formula of immaculatus inflation oh I

love it when I say that TS Lombard's

such a bear but that's okay aided by

tighter but not too tight monetary

policy profit margins stabilizing in Q2

at still high levels toss is a monkey

wrench into the idea of uh basically the

FED cutting uh so here's TS Lombard

coming out with their bear piece they're

saying look if you're getting

stabilization stabilization and profit

margins in Q2 then stabilizations and

profit margins are going to lead to more

hiring more hiring is going to lead to

the likelihood that you need to keep

rates higher but that's that maybe one

more raid hike that even Goolsby is

talking about is pretty much a straight

up dove

and ultimately

staying higher uh for for a longer level

right so so you get that extra rate hike

maybe we top out but it just takes a lot

longer to start getting cuts and the

cuts come slower than expected remember

there's this belief that the FED might

cut 25 BP at every meeting they could

also skip on the way down you could go

25 BP skip 25 BP skip until of course

something breaks but anyway this is a

problem that T.S Lombard argues and it

really Echoes what Bank of America said

this morning which suggests that his

stocks will probably be under pressure

for a while and the reason they'll be

under pressure is mostly because you're

in this this phase of okay well if we're

going to be hired for longer why don't

we just stay in bonds or other

Investments or or just money markets and

just wait for maybe maybe something to

break and then go by at that point money

markets would be your best Opportunity

by the way in my opinion not

personalized Financial advice to be

prepared for something breaking because

you're not exposed to the risk of your

bonds losing value if you're in bonds

and you're not exposed to stocks losing

value if you're in stocks

so anyway uh okay I expect so TS Lombard

goes in it says I expect profit margins

to contract in Q3 so this actually goes

from the argument that oh well things

are going to be higher for longer

because profit margins are higher and

now flipping into the idea of oh but

wait don't worry the earnings recession

is still coming that Q3 Q4 time frame

which is kind of what uh you know you've

had your Mike Wilson over at Morgan

Stanley always complaining about it's

coming we're gonna have more uh uh you

know earnings crushes and to this point

expect profit margins to contract in Q3

given that Q over Q growth and final

sales of domestic product has been

dropping relative to the 90-day paper

rates spreads have turned negative a

cautionary signal and Q4 moving averages

suggesting that the economy

basically about to slow if however the

relationship fails to hold in the

current quarter and we see them hiring

data and uh and uh basically improve and

the recession gets delayed even further

then guess what more higher for longer

so you have this like bearish argument

here and it's a very interesting bearish

argument because it's kind of like the

Bears can't be wrong Bears can't be

wrong that's basically what TS Lombard

is arguing uh I actually think the Bears

can be wrong I'll tell you how but you

should already know how but uh the Bears

the Bears can't be wrong argument is

either earnings recession and EPS pain

slash valuation contraction right uh

evaluation contraction multiple multiple

contraction or

you get recession

which basically just leads to EPS

decline

either way you're screwed so you have uh

well I guess this could almost be one of

the same right you could say uh you have

an earnings recession an EPS pain

and uh or or and or recession causing

that EPS pain and then you could say

that the second argument is or stronger

but then higher for longer and delayed

EPS pain that's basically what they're

arguing okay this is how the Bears say

they can't be wrong now one of the

reasons that I argue that uh there's

actually a good chance there's could be

wrong is because I believe that the

market is mostly of this mindset of okay

we need to uh get used to the idea that

inflation could actually end up being

transitory let's grab the Bell quickly

and explain this supported

podcast company that's a nice entry into

what Disney did yesterday seven handle

Jim

for the first time in several years yeah

we had Michael Nations you know on this

morning uh really talking about the

upper hand belongs and corner I don't

know what to do if I got the charter a

piece of paper just missing Bob Bob Iger

you have to give us Disney anyway

perfect opportunity for me to mention

that uh we are doing this uh uh we're

basically bundling together all the

courses and we're gonna raise the prices

of all the courses probably within the

next week here so stay tuned for more

information on that but basically if you

want to get into an individual course

and you want the best price possible now

is the time to do it you get lifetime

access to the live streams uh getting

before that changes uh because we've got

some big announcements coming and it's

going to be a lot more expensive to get

into the courses uh for for the ones

we've got right now which are really

amazing and uh and the lifetime access

to the live stream so check those out

link down below but let's go back to

this uh this idea here which is that my

argument as to why while the Bears argue

they can't be wrong one of the reasons

you actually could be wrong is that as

our country becomes more comfortable

with this idea of inflation going away

you you end up having what I've always

called for this this very sort of

volatile Nike Swoosh recovery uh and

this would be over years and so far

that's exactly what's been happening I

expect that to somewhat continue

okay so let's see what else they say

here so so they wrap up their piece by

arguing The Profit pickup in Q2 means

the coming run of employment data uh has

added importance basically higher for

longer okay to be clear there will be

nothing in the August report that pushes

the FED to hike in September but current

employment trends this is a way of

saying like just because you're gonna

pause doesn't mean we're wrong

but current employment trends reflect

profit losses pre-q2 and inflation lags

employment if employment data

Trends reflect profit losses pre-q2 and

inflation lags employment okay if

employment data shows some undue

strength then rounding back to turn

around uh turn around to Q2 profits an

uptick in hiring will be strong signal

in federal race rights I lean towards

recession sooner rather than later based

on the jump in real yields at the long

end and the inventory cost of carry on

top of everything else including

warnings to mid-sized Banks to get their

balance sheets in order blah blah blah I

feel like it's kind of like uh I think

EPS is going to decline

and here's the kitchen sink it's kind of

a little bit of what I feel like the TS

Lombard argument here is on this

recession coming uh yeah but they're not

wrong right I mean strength in in GDP is

going to keep rates higher for longer

the question is how much does that

actually matter uh you know you look at

the Atlanta fed real GDP forecast the G

the GDP now they call it

um we're sitting at

5.6 percent and that's pretty aggressive

we actually get our next update

uh let's see here September 6th was the

last one oh it was just two days ago so

it's gonna be another okay the next

update is actually later today

later today we'll get the latest update

on the fednow GDP update what I think is

neat about this chart is just how

aggressive the Atlanta fed uh now real

GDP chart is versus other measures you

look at the same Lewis real GDP measure

and it's much more in line with what we

call the Blue Chip consensus which is

like the market consensus you can see

that right here this blue line is the

market thinking GDP is around two

percent and Atlanta thinking it's

somewhere on five and a half percent

which just seems a little wild but

anyway yeah uh it makes sense of why

there's this idea of hire for longer but

and this is why I think the Nike Swoosh

continues to hold

you have to remember that if the economy

and GDP are booming but inflation

continues to fall then it doesn't matter

remember Jerome Powell did not say we

are going to hike more if the economy is

strong

he said we're going to hike more if the

economy is strong and inflation is going

up

that's that's the key and I think a lot

of bears are really forgetting that now

and I really I feel bad for a lot of

people who have been 100 on the

sidelines and not at least having some

exposure uh and that's because they're

constantly looking for this bare

narrative without realizing that you're

basically getting cooked to death like a

frog in a in a Lobster Pot that you're

turning onto a boil it's like you're

just you're slowly getting unbeared but

if you're not allocating then you're

getting burned